Statements of Financial Accounting Standards In Taiwan

     
  SFAS No. 5   Long-term Equity Investments under Equity Method  
                            
   
  Status  
  Revised by the  Financial Accounting Standards Committee In Taiwan on 22 December 2005  
     
  Summary  
     
       The purpose of this Statement is to establish accounting standards for long-term  
  equity investments under equity method.  
     
       When an investor company holds more than 50% of an investee company’s stock with  
  voting rights, it generally has control over the investee company (a subsidiary company),  
  unless there are evidences to indicate that it does not has control.  
     When an investor company holds 20% or more of an investee company’s stock with
voting rights, it usually has significant influence over the operating, financing, and
dividend policies of the investee company (an associate company). 
     When an investor company holds less than 20% of an investee company’s stock with
voting rights, it usually has no significant influence over the investee company. 
However, if any one of the following situations is met, it is usually evident that the
investor company has significant influence:
          (a)an investor company’s ownership percentage in an investee company’s
              outstanding stock with voting rights is the highest among all the shareholders;
         
          (b)the president of an investee company is assigned by an investor company;
          (c)according to a joint venture contract, an investor company has the right of
                operation; or  
          (d)other situations indicating that an investor company has significant influence
              over an investee company.
Long-term equity investment under equity method
     
       An investor company’s equity investment shall be long-term equity investment under  
  equity method if any one of the following conditions is met:  
     
            (a)an investor company has control over the investee company;  
     
            (b)an investor company alone holds 20% or more of an investee company’s stock  
                with voting rights but it does not have control over the investee company,  
                unless it is evident that the investor company does not have significant  
                influence over the investee company; or,  
     
           (c)even though an investor company holds less than 20% of an investee  
               company’s stock with voting rights, but it has significant influence over the  
               investee company.  
     
  Exceptions to using the equity method for long-term equity investments  
     
       If an investee company has declared bankruptcy or been in the process of  
  reorganization under the supervision of the court, the equity method may not be applied.   
  However, before the court’s determination of bankruptcy or reorganization, the gains or  
  losses for the current year shall still be recognized in accordance with the equity method.  
     
  Recognition of gains or losses  
     
      When an investee company has net income or loss for the year, an investor company  
  shall recognize investment gains or losses in proportion to its equivalent stock ownership.  
     
       If an investor company has significant influence but not control over an investee  
  company, and if an investor company’s share of an investee company’s losses equals to  
  or exceeds the carrying amount of an investment accounted for under the equity  
  method, plus advances made by an investor company, then the recognized investment  
  losses shall be limited to the extent that makes the book value of a long-term investment  
  and advances equal to zero.  However, if any of the following conditions is met, the  
  investor company shall continue to recognize investment losses in proportion to its stock  
  ownership percentage:  
     
           (a)the investor company intends to continue its support for the investee  
               company, or  
     
           (b)an investee company’s losses are temporary and there exists sufficient  
               evidence showing imminent return to profitable operations in the near future.  
     
      Such credit balance on the book value of a long-term equity investment and advances  
  shall be treated as a liability on the balance sheet.  If an investee company subsequently  
  reports net income, an investor company shall resume applying the equity method only  
  after its share of that net income equals the share of net losses not recognized during  
  the period the equity method was suspended.  
     
  Elimination of intercompany unrealized gains or losses  
     
      The unrealized profits and losses from intercompany transactions between an investor  
  company and investee company during the current year shall be eliminated.  
     
 

Differences between investment cost and underlying equity in net assets

 
     
      The differences between investment cost and underlying equity in net assets should  
  be analyzed and accounted for according to the related allocation procedures of  
  acquisition cost specified in the Statements of Financial Accounting Standards No. 25:  
  Business Combinations.  If the differences come from the assets that can be depreciated,  
  depleted or amortized, then an investor company shall amortize such differences over  
  estimated remaining economic lives.  If the differences come from discrepancies between  
  the carrying amounts of assets and their fair market values, then an investor company  
  shall offset all unamortized differences when conditions making such over or under-  
  valuation are no longer present (e.g., asset reappraisal or sale of assets).  When the  
  investment cost exceeds the fair value of identifiable net assets acquired, the excess  
  should be recorded as goodwill.  When the fair value of identifiable net assets acquired  
  exceeds the cost, the difference should be assigned to non-current assets acquired  
  (except for financial assets not under equity method, assets to be disposed, deferred tax  
  assets, prepaid pension or other retirement benefits cost) proportionate to their  
  respective fair values.  If these assets are all reduced to zero value, the remaining  
  excess should be recognized as extraordinary gain.  
     
  Change in an investee company’s shareholders’ equity  
     
      A distribution of cash dividends from an investee company shall be regarded as a  
  reduction in long-term investments for an investor company.  If stock dividends are  
  distributed from an investee company through retained earnings or additional paid-in  
  capital, then the increase in the number of stocks shall be noted in the investor  
  company’s financial statements without making any journal entry.  An investor company  
  should make no journal entry when an investee company appropriates statutory retained  
  earnings (legal reserve) or special retained earnings (special reserve).   
     
  Impairment of long-term equity investment  
     
     An investor company should evaluate whether there are indications that an individual  
  long-term equity investment for an associate company has been impaired on the balance  
  sheet date.  If there are objective evidences that it has been impaired, an investor  
  company should follow the rules specified in the Statements of Financial Accounting  
  Standards No. 35: Impairment of Assets to compute the impairment loss for the individual  
  investment, by comparing its recoverable amount with its carrying amount.  
     
  Losing significant influence or control over investee company  
     
 

   If an investor company loses its influence over an investee company because of a

 
  decrease in ownership or other reasons, it shall cease using the equity method to  
  account for the investment.  Instead, it should follow the rules specified in the  
  Statements of Financial Accounting Standards No. 34: Financial Instruments: Recognition  
  and Measurement.  The new cost of investment will be the carrying amount of the  
  investment at the time of change.  
     
     This Statement also specifies disclosures about long-term investments under equity  
 

method.

 
 
Effective date  
 
     This most recent revised Statement becomes effective for financial statements for the  
  fiscal year beginning on and after January 1, 2006.  Earlier adoption is not allowed.  
     

Copy right(c) 2006 Accounting Research and Development Foundation in Taiwan
Address: 20th. F., No.17, Sec.1, Chengde Rd., Taipei, Taiwan
Tel:886-2-2549-0549